What is the primary purpose of insurance?

The primary purpose of insurance is to provide financial protection against losses. Insurance serves as a risk management tool that transfers the financial burden of unexpected events from an individual or business to an insurance company. When policyholders pay premiums, they are essentially pooling their resources to protect against potential financial hardships arising from events such as accidents, natural disasters, illness, or theft. In the event of a covered loss, the insurance company compensates the policyholder or other affected parties, helping to ensure that they do not suffer devastating financial consequences. This fundamental principle underpins the insurance industry and highlights the essential role that insurance plays in promoting financial security and stability for individuals and businesses alike.

While other options touch on aspects of insurance, such as covering legal liabilities or managing risks, they do not capture the overarching goal of insurance as effectively as providing financial protection against losses. Encouraging risky behavior contradicts the preventive nature of insurance, and managing investment portfolios falls outside the primary functions of standard insurance products.